Saturday, May 28

Government, unions and employers reach the first agreement to reform pensions in a decade

Agreement in the social dialogue on the first phase of the pension reform. Now yes, after months in which the agreement was announced as “imminent”, but it was more complicated than expected. The Government has reached this Monday, June 28, the consensus with the unions and businessmen to bring to the Council of Ministers the first block of changes of its promised reform of the system, with measures such as the new mechanism for the revaluation of pensions according to the CPI and incentives for voluntary delay in retirement. This Monday the technical table of social dialogue that has negotiated the measures has closed the last fringes and there is only the – expected – internal endorsement of the employer organizations to formalize the first social agreement on pensions in a decade.

A ‘check’ of up to 12,000 euros, 4% more pension or a mixed formula: the proposals to delay retirement

Know more

After the reform negotiated in 2011, pensions had been a source of conflict and disagreement, not only political, but also social. The Government of Mariano Rajoy legislated in 2013 its modifications of retirement unilaterally, such as the new mechanism of annual increases of 0.25%, without the support of social agents. Neither of the rest of the political formations in the Toledo Pact, which is the parliamentary commission that was created in the early 90s to remove pensions from the political battle and seek the maximum political consensus on this matter, key to the Welfare State.

Return to political and social consensus

The coalition government promised to repeal the PP pension reform, which Rajoy himself left unapplied at the end of his term due to the lack of support in the streets and in Parliament, and to legislate again with consensus. The promised new pension reform, later also a commitment with Brussels within the Recovery and Resilience Plan, has fallen on the shoulders of the Minister of Social Security, José Luis Escrivá, who this Monday achieved his first agreement on the matter.

The social pact on pensions comes after months of negotiations, once in November Congress endorsed by a large majority the recommendations of the Toledo Pact to review the system. The ‘white smoke’ this Monday comes several weeks in which the agreement was stuck mainly due to differences with the unions on when to repeal the sustainability factor. There were also some minor differences with employers, on forced retirement, which have been resolved this Monday.

The negotiation with the majority unions and employers (CCOO, UGT, CEOE and Cepyme) does not end here. After this first block of modifications, the social agents continue negotiating the second phase of announced changes, more complex and with more differences between the parties. The Government has promised in Brussels that the first phase has to be approved on December 31, 2021 and the second block has various time limits throughout 2022, as this calendar shows.

In reality, the negotiation on this first phase of changes does not end today either, since the Executive will translate the agreement into a bill that is now facing parliamentary processing. The goal promised in Brussels, and to which funds from the Recovery Plan are tied, is for the reform to be approved before the end of the year.

These are the most relevant changes

This first pension agreement has changes in several directions. On the one hand, the two key elements of the unilateral pension reform of 2013 are repealed, the annual increases according to the CPI are resumed to maintain the purchasing power of pensioners, budget support is agreed via Social Security taxes and agreed various incentive measures to encourage career expansion and effective retirement age delayed.

New mechanism to revalue pensions: the so-called revaluation index of pensions of the PP reform of 2013, which caused the annual increases of 0.25%, is ended. It is agreed to guarantee the purchasing power of pensions according to the CPI, with increases in accordance with the average annual inflation registered in November of the previous year. In case the CPI is negative, the pensions will not go down. The social agents undertake to evaluate this mechanism, every “five years”, of which they will report to the Toledo Pact.

The sustainability factor is repealed: The pact includes the repeal of the second key element of the Rajoy Government’s pension legislation, the sustainability factor, which was never applied and which linked the amount of the pension to life expectancy, which was expected to will cause a decrease in future pensions. The Government and social agents have agreed to start “immediately” the negotiation of the intergenerational equity index that will replace the sustainability factor and that will operate from 2027. The new index, of which Minister Escrivá has barely advanced details, will be incorporated into the Bill of this first block of changes before the rule comes into force, in January 2022. Social dialogue has room to negotiate until November of this year. If they do not reach a consensus on the matter, the Government will include the index it considers.

Disincentives to early retirement: The penalties for voluntary early retirement are modified, becoming annual instead of quarterly. The change seeks above all to avoid early departures in the first two months in which it is available (from two years before reaching the legal retirement age, therefore the 23rd and 24th month). In those two months, the penalties increase compared to the current ones, but as of month 22 they decrease and reduce the pension less than the current system of disincentives.

For workers who have high salaries and are expected to retire with the maximum pension, the penalties will be the same as those applied to other employees (that is, they will go up because now in practice they remain at 4% compared to the general 16% ), but it will be done progressively and starting in 2024. In addition, and this is fundamental, the agreement with the social agents includes that the increase in penalties for these high-wage workers will occur at the same rate as the maximum pension increases, so that the increase is “absorbed” and “the recognized pension is not less than the one that would have corresponded to it with the application of the rules in force in 2021”.

Greater access to involuntary early retirement: new assumptions are included for accessing involuntary early retirement (with lower penalties and which can be accessed earlier), which will also have monthly and not quarterly reducing coefficients. It is added, for example, to people who are collecting unemployment benefits at the time of early retirement for at least three months.

Delayed retirement is rewarded more: Another way to promote the expansion of professional careers is the higher reward for delayed retirement (beyond the legal retirement age). More will be rewarded with financial incentives that can be chosen: between a 4% increase in retirement for each year of delay, an amount of money at the time of retirement that can reach 12,000 euros or a combination of both.

More restriction on forced retirement: In general, forced retirement may not be agreed in collective agreements for workers under 68 years of age. To agree to it, the company will have to hire a person with a fixed contract in exchange. This general criterion will have some exceptions, in which some sectors may agree to forced retirements from the retirement age.

Support from Social Security via Budgets: The pact also includes the commitment that the financing of Social Security will be supported in the coming years of the legislature through the General State Budgets, that is, via taxes. The Budgets will assume items that until now paid the Social Security amounting to about 21,000 million euros per year.

Other complementary measures: the agreement with the unions and employers includes important commitments in various matters, which have not yet been put into practice, among which are the commitment to equalize access to the widowhood pension for de facto couples and marriages, the promise that scholarship recipients will contribute to Social Security within three months (even if they do unpaid internships), for which companies will be supported with 75% bonuses and the future approval of the self-employed contribution system will be advanced according to their real income (the details have yet to be agreed), which will be approved in 2022, “without producing economic effects until 2023” and with a progressive deployment “up to a maximum of nine years.”